The first issue - "EXPLORE" AND "EXPLORATION"
18 In order for Shell to be entitled to depreciate the cost of its additional proportional interest in the statutory titles, the activities in which Shell participated as a joint venturer in the Browse Project as a holder of those statutory titles must have the requisite character of activities undertaken "for exploration". The Commissioner accepted that the activities in question had that character if those activities constituted "exploration" in the sense in which that term is used in the Commonwealth Act and the State Act (collectively the Petroleum Acts), being the source of Shell's authority to "explore for" petroleum pursuant to the permissions granted by the statutory titles. The activities in question were activities conducted for the purpose of evaluating the feasibility of recovering petroleum and the particular issue between the parties, both in the court below and on appeal, is whether the terms "explore" and "exploration" as used in the Petroleum Acts include activities directed to the recovery of petroleum on an appraisal basis. In the court below, the primary judge accepted Shell's contention that such activities constituted "exploration" for the purposes of the Petroleum Acts and, thus, constituted "exploration" for the purposes of s 40-80 of the ITAA 1997. The Commissioner, on appeal, contended that the primary judge adopted an erroneous and overly broad construction of the terms "explore" and "exploration" as used in the Petroleum Acts and argued that those expressions describe activities directed only to the discovery of petroleum, and do not encompass activities directed to investigating the commercial recoverability of petroleum that has been discovered by a permit holder. For the reasons that follow, the primary judge was correct to accept the construction urged by Shell.
19 The provisions of the Petroleum Acts are to similar effect and should be considered together. Under both Petroleum Acts there is a statutory prohibition on the unauthorised exploration for petroleum in an offshore area: authorised exploration is, relevantly, exploration authorised by a petroleum exploration permit: see s 97 of the Commonwealth Act; s 19(1) of the State Act. The word "petroleum" in both Petroleum Acts is defined to include "any naturally occurring hydrocarbon": s 7 of the Commonwealth Act; s 4 of the State Act.
20 Section 97 of the Commonwealth Act provides:
97 Prohibition of unauthorised exploration for petroleum in offshore area
(1) A person commits an offence if:
(a) the person explores for petroleum; and
(b) the exploration occurs in an offshore area.
Penalty: Imprisonment for 5 years.
(2) Subsection (1) does not apply to conduct that is:
(a) authorised by a petroleum exploration permit; or
(b) otherwise authorised or required by or under this Act.
21 Section 19(1) of the State Act similarly provides that a person "shall not explore for petroleum in [the waters adjacent to Western Australia] except under and in accordance with a permit". The term "permit" is defined in s 4 to mean an exploration permit for petroleum.
22 The Petroleum Acts also contain provisions prescribing the rights conferred on a holder of a petroleum exploration permit.
23 In the Commonwealth Act, those rights are prescribed in s 98, which relevantly confers on the holder of a petroleum exploration permit both the right to explore for petroleum in the permit area and the right to recover petroleum on an appraisal basis. Section 98 provides:
98 Rights conferred by petroleum exploration permit
(1) A petroleum exploration permit authorises the permittee, in accordance with the conditions (if any) to which the permit is subject:
(a) to explore for petroleum in the permit area; and
(b) to recover petroleum on an appraisal basis in the permit area; and
(c) to carry on such operations, and execute such works, in the permit area as are necessary for those purposes.
(2) Express references in this Act to the injection or storage of a substance do not imply that subsection (1) does not operate so as to authorise the permittee:
(a) to carry on operations to inject a substance into the seabed or subsoil of an offshore area; or
(b) to carry on operations to store (whether on a permanent basis or otherwise) a substance in the seabed or subsoil of an offshore area.
(3) The regulations may provide that a petroleum exploration permit authorises the permittee, in accordance with the conditions (if any) to which the permit is subject:
(a) to explore in the permit area for a potential greenhouse gas storage formation; and
(b) to explore in the permit area for a potential greenhouse gas injection site; and
(c) to carry on such operations, and execute such works, in the permit area as are necessary for those purposes.
(4) The rights conferred on the permittee by or under subsection (1) or (3) are subject to this Act and the regulations.
24 The equivalent provision in the State Act is found in s 28. Section 28 provides that an exploration permit for petroleum (see definition of "permit" in s 4) authorises the permittee "to explore for petroleum and to carry on such operations and execute such works as are necessary for that purpose".
25 Additionally both Petroleum Acts make provision for the grant of a lease to the holder of an exploration permit for petroleum in respect of the area in which the permit is in force (petroleum retention lease). The grant of a petroleum retention lease authorises the holder to undertake the same activities in the leased area which are authorised by the exploration permit: s 135 of the Commonwealth Act; s 38C of the State Act.
26 The Petroleum Acts contain a meaning of the term "explore":
(a) section 7 of the Commonwealth Act provides that the word "explore" when used in relation to petroleum has a meaning "affected by subsection 19(1)". Section 19 is headed "Extended meaning of explore" and sub-s (1) provides that for the purposes of the Act:
(a) a person:
(i) carries out a seismic survey, or any other kind of survey, in an offshore area; or
(ii) takes samples of the seabed or subsoil of an offshore area; and
(b) the person does so with the intention that the person or another could use the survey data, or information derived from the samples, as the case may be, for the purpose of discovering petroleum;
the person is taken to explore for petroleum.
(b) a similar meaning applies in the State Act - s 19(2) provides that in s 19(1), "to explore for petroleum" includes "to conduct any geophysical survey, the data from which is intended for use in the search for petroleum".
27 It is well established that the task of statutory construction begins and ends with the statutory text, which must be considered in context, including by reference to the legislative history and extrinsic material: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 at [39], quoting Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; 239 CLR 27, [47]. Both parties argued that the text, context and legislative history of the Petroleum Acts support their respective claims - on Shell's case, and as the primary judge found, the term "explore" includes recovery of petroleum on an appraisal basis and, on the Commissioner's case, the term has the more limited meaning of an activity "for the purpose of discovery".
28 The primary judge preferred Shell's construction. His Honour reasoned as a matter of language and statutory context that the term "explore" as used in the Petroleum Acts should be interpreted to mean offshore activities undertaken to determine whether there is recoverable petroleum: at [237]. In so concluding, His Honour did not address the legislative history on which both parties now rely on appeal in support of their competing constructions. However, although his Honour preferred Shell's construction, his Honour rejected Shell's contention that the sovereign rights declared by the terms of the Seas and Submerged Lands Act 1973 (Cth) (Seas and Submerged Lands Act) was a contextual matter supporting the construction which Shell urged: see [224]. The primary judge's rejection of that part of Shell's argument is the subject of ground 3 of the cross-appeal.
29 Both parties, as the starting point, drew upon the dictionary meaning of the word "explore" to support their respective constructional arguments. The Macquarie Dictionary defines the verb "explore" to mean:
to traverse or range over (a region, etc.) for the purpose of discovery; to look into closely, scrutinise, examine
and the noun "exploration" to mean:
the act of exploring;
the investigation of unknown regions.
The Oxford English Dictionary variously defines the verb to mean:
to establish facts concerning, find out about (the condition or nature of something); to ascertain, find out, discover; to inquire into or discuss (a subject) in detail; to assess, evaluate (an option, a possibility etc.); to investigate.
and the noun "exploration" is defined to include:
The searching and testing of a designated area for natural resources, in order to determine whether mining or extraction activities are commercially viable.
30 Shell placed great reliance on the last defined sense in the Oxford English Dictionary whereas the Commissioner argued that Shell disregarded the preposition "for" in its reliance on that last defined sense, submitting that "exploration", as there defined, entails searching and testing an area for the resources themselves with the phrase following the comma describing the purpose of that activity. The Commissioner also contended that to observe, as the primary judge did, that "exploration" describes "a purposive activity" did not advance the analysis because, in the Petroleum Acts, the purpose of the relevant exploration is the discovery of petroleum - ie, to explore "for petroleum" - that is, the resource. It was further submitted that if, as the primary judge held, "exploration" in the Petroleum Acts encompasses all activities directed to investigating the commercial recoverability of petroleum, the extended definition in s 19(1) of the Commonwealth Act would have no work to do and, the argument went, instead, the presence of the extended definition indicated that in the Petroleum Acts "exploration" otherwise bears its ordinary, or limited, meaning of describing activities directed to the discovery of petroleum.
31 Ultimately I did not find the dictionary meanings of great assistance to the process of construction in ascertaining the intended scope of those terms as they appear in the Petroleum Acts, because the natural and ordinary meaning of those terms do not decisively favour one construction over the other as a matter of textual analysis. Those terms are of sufficiently wide embrace in their ordinary and natural meaning to cover activities conducted for the purpose of evaluating the feasibility of recovering petroleum. To put it another way, an activity directed to "discovering" whether petroleum is recoverable does not require a departure from the ordinary and natural meaning of the verb "to explore" or the noun "exploration". Nor does the use of the preposition "for", as a matter of language, compel a different view. The word "for" in ordinary meaning means "with the object or purpose of" (see the Macquarie Dictionary) and as the word "explore" does not have a precise or rigid meaning as a matter of language, the expression "exploration for petroleum" is wide enough in meaning to include activities undertaken for the purpose of appraising the recovery of petroleum on a commercial basis as a matter of textual analysis.
32 The "extended meaning of explore" found in s 19 of both Petroleum Acts, when used in relation to petroleum, also does not point firmly one way or the other in answer to the construction question. The Commissioner placed weight on the following reason given in the Explanatory Memorandum, Offshore Petroleum Bill 2005 (Cth) (at 11) (2005 Explanatory Memorandum) for the introduction of s 19 in the Commonwealth Act in its original form:
This clause extends the common, dictionary meaning of the word "explore" in order to regulate all seismic surveying, seabed sampling surveys and various airborne remote sensing techniques such as gravity, magnetic and laser fluorimetry surveys that are designed to assist in locating petroleum reserves…
(italics added for emphasis)
It was submitted that if, as the primary judge held, "exploration" in the Commonwealth Act encompasses all activities directed to investigating the commercial recoverability of a hydrocarbon deposit, the extended definition in s 19(1) would have no work to do. Instead, it was argued, the presence of the extended definition indicates that in the Petroleum Acts "exploration" otherwise bears its ordinary, more limited, meaning. However as the 2005 Explanatory Memorandum goes onto state (at 11):
Such surveys can be carried out by various titleholders under the Act or by parties who are not themselves petroleum explorers. In the latter case, the surveys are performed by speculative survey companies … who aim to sell the survey results to titleholders.
Without this clause, there is doubt whether such speculative activities could be regulated under the proposed Act
(italics added for emphasis)
It is apparent that the only purpose of the provision was to remove doubt as to whether the types of activities to which it refers constituted "exploration" and, as the primary judge cautioned at [199], care should be exercised in drawing conclusions from the terms of s 19 as to what is meant by "explore" in circumstances where, save for those activities which are deemed to be exploration, the Commonwealth Act deploys the ordinary contextual meaning of the term "explore".
33 Both parties argued that considerations of context, including the legislative history, supported their competing constructions. On Shell's case, the context shows that the terms "explore" and "exploration" as used in the Petroleum Acts are not intended to have the confined meaning urged by the Commissioner. On the contrary, Shell argued, the Petroleum Acts are part of a cohesive national regulatory scheme for the exploration and exploitation of natural resources in the continental shelf. Under that regulatory scheme, a distinction is made between "exploration" on the one hand and "exploitation" on the other hand, reflecting the rights of the Commonwealth under international law pursuant to the Convention on the Continental Shelf, opened for signature 29 April 1958, 499 UNTS 311 (entered into force on 10 June 1964) (Convention on the Continental Shelf) and the Convention on the Territorial Sea and the Contiguous Zone, opened for signature 29 April 1958, 516 UNTS 205 (entered into force on 10 September 1964) (Convention on the Territorial Sea and the Contiguous Zone), which were declared and enacted into domestic law by the Seas and Submerged Lands Act and confer exclusive sovereignty in the Commonwealth in respect of the seabed and sovereign rights in respect of the continental seabed "for the purpose of exploring it and exploiting its natural resources" (art 2(1) of the Convention on the Continental Shelf, now art 77(1) of the United Nations Convention on the Law of the Sea, opened for signature 10 December 1982, 1833 UNTS 3 (entered into force 16 November 1994) (Convention on the Law of the Sea); s 11 of the Seas and Submerged Lands Act). It was submitted that the regulatory scheme works by prohibiting all activities directed to the exploration and exploitation of the natural resources of the seabed in the continental shelf and that the Petroleum Acts achieve this regulatory prohibition by prohibiting "exploring for petroleum" otherwise than in accordance with a permit. Shell submitted that the Commissioner's construction would leave a lacuna in the regulatory scheme governing the exploration for petroleum in offshore areas. Shell argued that if the Commissioner's construction be accepted, it would follow that the Petroleum Acts do not statutorily prohibit recovery operations because an activity undertaken by the holder of a statutory title evaluating the recoverability of petroleum would not be "exploration" within the ordinary meaning of that word, whereas its construction provides a cohesive consistent regulatory framework without the regulatory lacuna that would arise on the Commissioner's construction. The Commissioner, on the other hand, contended that the Petroleum Acts provide for the regulation of specific offshore activities that are, or are closely associated with, carrying out either exploration for petroleum itself or recovery (exploitation) operations. It was submitted that this is exemplified by the various forms of prohibition and permission within the Petroleum Acts and that it is necessary to examine the nature and the character of the activity as to whether that activity requires an authority. It was submitted that timing is not determinative, as appears from the fact that holders of exploration permits, retention leases and production licences are all authorised to "explore for petroleum". It was further contended that regard to the legislative history supports that the terms "explore" and "exploration" as used in the Petroleum Acts do not have a correspondence with the wording of the Convention on the Continental Shelf. The Commissioner also argued that there is no lacuna, if his construction be accepted, because the amplitude of the regulation-making powers given to the Commonwealth under ss 781-2 of the Commonwealth Act and to the State under s 152 of the State Act are sufficiently wide to regulate any offshore work undertaken to exploit a discovered resource, including investigatory or preparatory activities undertaken for that purpose.
34 In my view, an understanding of the wider regulatory framework, including the international law position and the legislative history, supports the construction urged by Shell and leads to the conclusion that Shell should also succeed on ground 3 of its cross-appeal. It is necessary to examine that wider regulatory framework in some detail to explain why.
35 In the 1940s, the oil industry developed offshore drilling techniques and in 1945 the "Truman Proclamation" was issued (see The President, 1943-1948 Compilation CFR (1948)), declaring that the subsoil and seabed of the continental shelf of the United States of America (US) was "subject to its jurisdiction and control" (see p 68). This was followed by similar declarations, including by Australia in 1953, declaring "sovereign rights over the sea-bed and subsoil of the continental shelf…for the purpose of exploring and exploiting the natural resources of that sea-bed and subsoil": Commonwealth, Commonwealth of Australia Gazette, No 56, 11 September 1953, 2563 (1953 declaration).
36 On 30 October 1958, the Convention on the Continental Shelf was signed on behalf of Australia and the Convention came into force on 10 June 1964. Article 2 of that Convention stated:
1. The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources.
2. The rights referred to in paragraph 1 of this article are exclusive in the sense that if the coastal State does not explore the continental shelf or exploit its natural resources, no one may undertake these activities, or make a claim to the continental shelf, without the express consent of the coastal State.
37 Article 2 (now art 77 of the Convention on the Law of the Sea) established a "regulatory prohibition" falling short of a property right: Akiba v Queensland (No 2) [2010] FCA 643; 204 FCR 1, [729]-[730]; see also Commonwealth of Australia v Western Mining Corporation Resources Limited [1998] HCA 8; 194 CLR 1 at [22]-[23]; Re Newfoundland Continental Shelf [1984] 1 SCR 86, 97. The International Law Commission's report to the United Nations General Assembly explained that the reference to "sovereign rights" was not intended to be understood in the sense of sovereignty of a coastal State over the superjacent sea and the air space above it but was intended to confer on the coastal State "all rights necessary for and connected with the exploration and exploitation of the natural resources of the continental shelf" (Yearbook of the International Law Commission 1956 Volume II Documents of the eighth session including the report of the Commission to the General Assembly, UN Doc A/CN.4/SER.A/1956/Add.1 (November 1956), 297 (International Law Commission Report)). The rights of a coastal State were said to be "exclusive in the sense that if it does not exploit the continental shelf, it is only with its consent that anyone else may do so" (International Law Commission Report, 297).
38 Also on 10 September 1964, the Convention on the Territorial Sea and the Contiguous Zone was entered into force. Article 1(1) provided that:
[t]he sovereignty of a State extends, beyond its land territory and its internal waters, to a belt of sea adjacent to its coast, described as the territorial sea.
39 Up to 1967, the States and Territories granted exploration permits in offshore areas under their existing regulatory schemes, but there was no national scheme. By November 1965, the Commonwealth, States and Territories had agreed to implement a consistent national scheme. In announcing the agreement to Parliament, the Minister said: "[t]he new off-shore legislation will be a two-stage system" and "[a] permit will cover all stages of exploration including drilling, and a licence - equivalent to a lease on land - will cover production" (Commonwealth, Parliamentary Debates, House of Representatives, 16 November 1965, 2742 (David Eric Fairbairn).
40 Two years later, the Commonwealth Parliament enacted the Petroleum (Submerged Lands) Act 1967 (Cth) (the 1967 Act) and the WA Parliament enacted the analogous Petroleum (Submerged Lands) Act 1967 (WA)). The 1967 Act introduced a regime for the issue of an exploration permit or production licence over an offshore area. The 1967 Act used the expression "explore for petroleum" but did not define "explore" or "exploration". The Commissioner argued that the terms of the 1967 Act and the remarks of the Minister in his second reading speech introducing the Bill support a conclusion that those expressions in the 1967 Act were intended to bear their ordinary meaning of activities directed to the discovery of petroleum, noting that:
(a) under the 1967 Act, an exploration permit entitled the holder to "explore for petroleum" (ss 19, 28);
(b) notice was required to be given to the relevant "Designated Authority" by the holder of an exploration permit forthwith upon any discovery of any petroleum in the permit area, with appraisal activities to occur thereafter (ss 34, 35); and
(c) a holder of a production licence was relevantly authorised not only to "carry on operations for the recovery of petroleum" but also "to explore for petroleum" in the licence area (s 52).
41 The Commissioner emphasised that the Minister observed in his second reading speech that the relevant governments had joined together to ensure the legal effectiveness of "titles authorising the search for or production of petroleum …" (Commonwealth, Parliamentary Debates, House of Representatives, 18 October 1967, 1941 (David Eric Fairbairn) (1967 second reading speech)). The Minister also made repeated reference to "discoveries", "discovery", "further discoveries" and "searching for petroleum". The Minister explained s 52, allowing the holder of a production licence to "explore for petroleum" even though petroleum had already been discovered within the licence area, by observing that an operator would wish to "explore the whole of [the] licence area thoroughly in the hope that other petroleum bearing structures may be discovered" (1967 second reading speech, 1950). It was submitted that it was clear from these comments that "exploration" in the 1967 Act did not encompass an investigation of commercial recoverability. I disagree. The language used by the Minister in his second reading speech was somewhat imprecise and I do not think that the significance which the Commissioner has attached to the language can be drawn. More particularly, it is clear that Parliament intended to adopt the distinction drawn in the Convention on the Continental Shelf between exploration and exploitation. The preamble to the 1967 Act referred to the Convention on the Continental Shelf and invoked Australia's "sovereign rights over the continental shelf … for the purpose of exploring it and exploiting its natural resources". The 1967 Act contained two prohibitions: one on exploration without a permit (s 19); and the other on "operations for the recovery of petroleum" (ie exploitation) except under licence (s 39). Exploration required a class of permit called an "exploration permit" authorising the permittee "to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the permit area" (s 28). "Operations for the recovery of petroleum" required the grant of a production licence for petroleum (s 52). It is also relevant that the Minister in the second reading speech reiterated that the intention was to create a two-stage system, the first of which covered "all stages of exploration" and the second of which covered "production of petroleum" and it is plain enough that the two-stage system reflected the distinction drawn in the Convention on the Continental Shelf between exploration and exploitation (see 1967 second reading speech, 1947).
42 The Commissioner contended that the immediate context for the Minister's reference to "all stages of exploration" was the Minister's 1967 second reading speech statement (at 1947) that:
the general run of State and Territory petroleum legislation provided for a three-stage title system. A permit covered basic exploration, a licence over a much smaller area gave permission to carry out drilling operations, and a lease covered the production stage.
It was submitted that the reference to "all" stages of exploration in the subsequent sentence was therefore to "basic exploration" (the first stage under the old State legislation) and the carrying out of drilling (exploration or appraisal drilling, being the second stage under that legislation). I do not accept that contention which, in my view, unfairly parses the first two sentences of the relevant paragraph of the second reading speech without due regard to the content of the Minister's speech about "the new off-shore legislation".
43 It is also noteworthy that when the 1967 Act was enacted, the High Court had twice addressed the distinction between exploration and development activities in the mining context. In Mount Isa Mines Ltd v Federal Commissioner of Taxation [1954] HCA 53; 92 CLR 483, Taylor J explained at 490 that "prospecting and exploration work precedes the work of 'development'" and "is undertaken to ascertain, as far as possible, whether the commencement of mining operations would be justified or prudent": see also Wyong Shire Council v Associated Minerals Consolidated Ltd [1972] 1 NSWLR 114, 119E. In Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [1969] HCA 16; 120 CLR 240, the court distinguished between "work for the purpose of ascertaining whether it is worthwhile to undertake mining at all" and "mining operations": at 245, 272. Although these cases were not concerned with the legislation in issue, the two-stage system implemented under the 1967 Act separately regulating "exploration" activities and exploitation activities has a coherence with the distinction drawn in those cases between exploration and commercial operations.
44 In 1973, Australia's rights under the Convention on the Continental Shelf and the Convention on the Territorial Sea and the Contiguous Zone were enacted into domestic legislation by the Seas and Submerged Lands Act. The preamble referred to the two 1958 Conventions and the Act as a whole implemented their foundational concepts - sovereignty over the territorial sea (s 6), and sovereign rights over the continental shelf (s 11) - into Australian law. The "sovereign rights" of Australia in the continental shelf were, in accordance with art 2(2) of the Convention on the Continental Shelf, exclusive in the sense that no one else could undertake those activities without Australia's consent. That exclusivity was referred to in the second reading speech which noted that "[t]he objective of the Bill … [was] to remove any doubt about the exclusive right of the Commonwealth to sovereign control over the resources of the sea bed" (Commonwealth, Parliamentary Debates, House of Representatives, 11 September 1973, 766 (Rex Connor)).
45 The validity of the Seas and Submerged Lands Act was challenged (and affirmed) in the New South Wales v Commonwealth [1975] HCA 58; 135 CLR 337 (Seas and Submerged Lands Act Case). That case held that States had no sovereignty or proprietary rights outside the low-water mark, including in the territorial sea. That gap in State power was addressed by the "offshore constitutional settlement" which included the enactment of a suite of laws including the Coastal Waters (State Powers) Act 1980 (Cth) (which effectively gave States legislative power in the territorial sea) and the Coastal Waters (State Title) Act 1980 (Cth) which vested in each State "the same right and title to the property in the sea-bed beneath the coastal waters of the State … as would belong to the State if that sea-bed were the sea-bed beneath waters of the sea within the limits of the State" (s 4(1)).
46 In 1982, Western Australia enacted the State Act. The preamble referred to the Convention on the Continental Shelf, the offshore constitutional settlement and the vesting of sovereignty in the territorial sea affirmed in, or effected by, by the Seas and Submerged Lands Act. The preamble also asserted that "the Parliament of the Commonwealth ha[d] vested in the Crown in right of each of the States … certain proprietary rights in respect of that sea-bed and subsoil". The effect of the State Act was to exert State control over exploration and exploitation of the "adjacent area", being (effectively) that part of the territorial sea sovereignty in which had been vested in the State of Western Australia.
47 Also in 1982, the Convention on the Law of the Sea was done. The Convention entered into force on 16 November 1994. Articles 2 and 77 affirmed the sovereignty and sovereign rights given to coastal States over the territorial sea and continental shelf respectively. Article 56(1) affirmed coastal States' rights over a newly-recognised area, the exclusive economic zone. In the exclusive economic zone, States had "sovereign rights for the purpose of exploring and exploiting … the natural resources … of the seabed and its subsoil". The key provisions were implemented by the Maritime Legislation Amendment Act 1994 (Cth) which inserted a new s 10A into the Seas and Submerged Lands Act stating, "[i]t is declared and enacted that the rights and jurisdiction of Australia in its exclusive economic zone are vested in and exercisable by the Crown in right of the Commonwealth".
48 In 1985, the Commonwealth enacted the Petroleum (Submerged Lands) Amendment Act 1985 (Cth) (the 1985 Act). Section 5 inserted a new div 2A of pt III into the 1967 Act. That created a new tenure known as a "retention lease". A retention lease application was to include particulars of "the commercial viability of the recovery of petroleum" from the proposed lease area and "particulars of the possible future commercial viability of the recovery of petroleum from that area" (s 38A(2)(c)(ii)). The "Joint Authority" was empowered to grant a retention lease provided it was satisfied that recovery of petroleum was not presently "commercially viable" but was "likely to become commercially viable within the period of 15 years" (s 38B(1)(c)). Section 38C identified the authority given to a retention lessee, namely, "to explore for petroleum, and to carry on such operations and execute such works as are necessary for that purpose, in the lease area". The Explanatory Memorandum to the 1985 Act explained that the purpose was to "provide for the granting of retention leases over currently non-commercial discoveries" so as to "allow explorers to retain tenure over discoveries until they become commercial" (Explanatory Memorandum, Petroleum (Submerged Lands) Amendment Bill 1985 (Cth) 1 (1985 Explanatory Memorandum)). In other words, the purpose of a retention lease was to recognise tenure after discovery of petroleum but before commercial viability was established. Retention leases did not (and do not) authorise recovery for appraisal purposes. The 1985 Explanatory Memorandum referred to the obligation on applicants for a retention lease (under s 38A) to provide particulars of proposed work in the lease area, and explained that "[t]he proposed work may include seismic surveying, drilling wells, or evaluation studies to further assess the commercial viability of petroleum production from the area" (at 4). The 1985 Explanatory Memorandum then addressed the operation of s 38C - the provision identifying the rights of a retention lessee - as follows (at 6):
[w]hile the lease remains in force, the lessee is authorised to carry out petroleum exploration work and operations including the evaluation of the commercial viability of petroleum production within the lease area.
As submitted for Shell, and contrary to the Commissioner's contention, it is clear that what Parliament intended was that the authority to explore for petroleum and to carry on associated works included an authority to do things directed to evaluating commercial viability.
49 In 1990, a regime for retention leases (analogous to that in the 1985 Act) was inserted into the WA State Act: Acts Amendment (Petroleum) Act 1990 (WA). In 2006, the Commonwealth Act was enacted and effectively transferred across the existing provisions for retention leases from the 1985 Act. The 2005 Explanatory Memorandum (at 52) explained that retention leases were intended to:
… giv[e] the holder … rights to do everything required in the lease area to explore for petroleum, including seismic surveys, gravity surveys, magnetic surveys or seabed sampling, the drilling of wells and the recovery of petroleum for appraisal purposes.
50 The Commonwealth Act also introduced a new authority attaching to exploration permits and retention leases, being an authority to "recover petroleum on an appraisal basis": (after renumbering) ss 98(1)(b), 135(1)(b). The Commissioner submitted that the introduction of an express grant of permission to undertake a different and discrete form of activity following the discovery of petroleum supported a construction that recovery on an "appraisal basis" is not otherwise encompassed within the concept of "exploration". Shell submitted that the obvious purpose of that limited authority was to permit recovery of petroleum, which would otherwise be caught by the prohibition on recovery imposed by s 160(1) (after renumbering). I accept Shell's submission for the reasons given by the primary judge at [238], namely it puts beyond doubt that appraisal activities that involve the recovery of petroleum do not fall within the definition of petroleum recovery operations.
51 Key propositions which can be drawn from that statutory history are as follows:
(a) there is nothing in the statutory history or in the enactment in the Commonwealth to suggest that Parliament intended that "exploration for petroleum" should be limited to the discovery of petroleum and not include activities directed to investigating the commercial recoverability of petroleum;
(b) the prohibitions on exploration and recovery under the Petroleum Acts reflect the distinction drawn in the text of the two Conventions between "exploration" on the one hand and "exploitation" and that the terms "explore" and "exploration" as used in the Petroleum Acts have a meaning that corresponds with the word "exploration" in the Seas and Submerged Lands Act;
(c) there is a cohesive national regulatory scheme governing offshore activities of which the Petroleum Acts are part;
(d) the Petroleum Acts should be construed so as to operate harmoniously within cohesive national regulatory scheme;
(e) as the primary judge held, if Shell's construction be accepted, there is a consistent regulatory prohibition covering each stage of an offshore petroleum project and no lacuna in the activities requiring authorisation; and
(f) the statutory history does not suggest that Parliament intended a lacuna in the activities requiring authorisation.
52 The primary judge, in his consideration of the construction issue, observed as follows at [233]-[237]:
… The long title to the [Commonwealth Act] describes the Act as being 'about petroleum exploration and recovery'. The long title to the [State Act] describes the Act as making provision 'with respect to the exploration for and the exploitation of petroleum resources'. The exploration activities regulated by both of the [Petroleum Acts] are activities that are undertaken in order to recover petroleum or to exploit the discovered petroleum resources. Before committing to the production of petroleum it is necessary to investigate whether it can be produced and whether there are commercially viable means of doing so. Mere discovery of the existence of petroleum is not the object of the [Petroleum Acts]. Therefore, when they regulate the activity of petroleum exploration in offshore areas they may be expected to be concerned with all types of activities that may be undertaken in order to determine not only whether there is petroleum, but whether petroleum that has been discovered is recoverable.
So, the context indicates that the authority or permission that is given to explore for petroleum in a particular offshore area is not just about activities undertaken to find out whether there is petroleum, or even just about the further process of delineating the nature and extent of any petroleum field that is discovered. It also encompasses further activities that might be undertaken in the relevant area to determine whether there is recoverable petroleum. On that basis, activities undertaken within the relevant offshore area that have that purpose are an exercise of the authority or permission conferred by the Statutory Titles.
Further, it is to be noted that there is no language that suggests that the extent of the permission depends upon whether the activity is being undertaken at a time when the commercial evaluation of the recoverability of the petroleum has reached a particular stage. The language used does not indicate that a determination as to whether an activity is exploration for petroleum depends upon understanding the progress of the evaluation of recoverability being undertaken by the holder of the particular statutory permission or authority. The focus is upon the activity and the purpose that would be served by an activity of the particular kind irrespective of who was undertaking the activity.
As to the use of the term 'discovery' in the expanded definition in the [Commonwealth Act], it is not a term that is inherently confined to the initial 'strike'. Merely knowing that there is petroleum at a particular location does not mean that it may be safely concluded that there is petroleum that may be recovered. As has been noted, the evident overall purpose of the [Commonwealth Act] is to regulate petroleum exploration and recovery. It is concerned with activities that go beyond identifying where petroleum is located, to identifying where recoverable petroleum is located. The same may be said of the reference in the [State Act] to searching for petroleum.
Having regard to the preceding matters, and adopting a contextual approach, the term 'explore' as used in the [Petroleum Acts] should be interpreted to mean offshore activities undertaken to determine whether there is recoverable petroleum. Activities that might be connected in some way with exploration but are not undertaken in the area are not prohibited and are not the subject of the permission.
I agree and adopt those passages.
53 In the course of reasoning, His Honour rejected Shell's argument that the "regulatory prohibition" on activities in offshore areas in respect of which the Commonwealth enjoys the sovereign rights declared by the Seas and Submerged Lands Act is a contextual reason supporting the meaning of the term "explore" as used in the Petroleum Acts as contended by Shell. His Honour rejected that submission on the basis that even where sovereignty exists over offshore areas regulated by the Petroleum Acts there is no prohibition on activities unless or until those sovereign rights are exercised in a manner that would give rise to that prohibition: at [223]-[224]. The rejection of that argument is the subject of ground 3 of the cross-appeal. Shell contended that the primary judge ought to have held that there is a regulatory prohibition on engaging in activities directed to or involving the exploration and exploitation of the natural resources of the seabed in the continental shelf and, it was submitted, that regulatory prohibition is a contextual matter supporting its construction. Nonetheless, as Shell accepted in argument on appeal, irrespective of whether the Seas and Submerged Lands Act had the effect on its terms of creating a separate regulatory prohibition, the term "explore' as used the Petroleum Acts should bear the same meaning as intended in the Seas and Submerged Lands Act. As I have accepted that proposition, it is accordingly unnecessary to consider and determine ground 3 of the cross-appeal.